Rep. Towns: Moody's has no paper trail of Kolchinsky probe

SarahN. Lynch

WASHINGTON (MarketWatch) -- A law firm hired to investigate the most recent claims by an ex-Moody's analyst that the company continues to inflate its ratings has preliminarily concluded those allegations are unfounded, a top Moody's executive told a U.S. House panel Wednesday.

Richard Cantor, the chief credit officer at Moody's Investors Service, told the U.S. House Oversight Committee that Moody's hired the law firm Kramer Levin to investigate former employee Eric Kolchinsky's complaints about the ratings firm, a unit of Moody's Corp.
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Its preliminary findings, Cantor said, "are consistent with Moody's internal review - that the claims of misconduct are unsupported." He added that the issues Kolchinsky raised are "of longstanding and healthy debate" within Moody's.

Kolchinksy was suspended on Sept. 3 after he declined a request from a Moody's human-resources officer to meet with an external lawyer. He said in an interview earlier this month that he had spoken to the lawyer on the phone a few days earlier but declined the face-to-face meeting because he wanted his own attorney to be present and was notified of the Sept. 3 meeting only minutes in advance.

Cantor added that the law firm hired was given "unfettered access" to Moody's records.

"Moody's didn't direct the investigation," he said, adding that the law firm interviewed 22 Moody's employees. "The only person who refused to meet" with the law firm was Kolchinsky, he said.

House Oversight Chairman Edolphus Towns, D-N.Y., told Cantor he wants Moody's to turn over all the documents from the law firm's investigation. Cantor responded that he will pass along the request to Moody's lawyers and he is "confident they will be able to comply."

Kolchinksky and a former Moody's compliance officer, Scott McCleskey, testified the U.S. House Oversight Committee Wednesday about what they believe are continuing failures at Moody's in how it conducts and monitors its ratings.

McCleskey's testimony centered around issues he raised to the SEC in March about how Moody's replaced several compliance officers in 2008 with analysts and managers who were previously involved in rating structured-finance and mortgage securities. He said he was "pushed out" by Moody's in September last year after being replaced.

Kolchinsky, meanwhile, discussed what he believes are continuing problems with conflicts of interest and inflated ratings.

(Serena Ng contributed to this article.)

WASHINGTON (MarketWatch) -- The Chairman of the House Oversight Committee said Wednesday that documents he requested from an outside law firm hired by Moody's to probe an ex-employee's complaints about its ratings don't exist.

Chairman Edolphus Towns, D-N.Y., made his comments at the close of a hearing where two ex-Moody's employees told lawmakers they felt Moody's still faces grave conflicts of interest, inflate their ratings and fail to update stale ratings on municipal bonds. Moody's Investors Service Chief Credit Officer Richard Cantor told Towns on Wednesday that the company has retained the outside law firm Kramer Levin to investigate former employee Eric Kolchinsky's complaints that Moody's inflates its ratings and has preliminarily concluded his complaints are unfounded.

Towns demanded that Moody's produce documents from that investigation for the committee, which has subpoena power. Cantor told Towns he thought Moody's would be able to comply.

But a few hours later, Towns revealed that Moody's had apparently privately told committee officials there are no documents they can produce.

"This morning we learned that this outside firm was given only oral instructions," Towns said. "Moody's says there is no written statement of work and no contract specifying the work to be done. In addition, this outside firm is not expected to produce any written report of its findings and has no schedule for completion.

"In other words, the Moody's business model could be summed up as, 'Leave No Fingerprints'," Towns added.

Mr. Kolchinksy was suspended on Sept. 3 after he declined a request from a Moody's human-resources officer to meet with a lawyer from Kramer Levin that day. He said in an interview earlier this month that he had spoken to the lawyer on the phone a few days earlier but declined the face-to-face meeting because he wanted his own attorney to be present and was notified of the meeting only minutes in advance. Mr. Kolchinsky had also asked for a written agenda of what would be discussed at the meeting, but says he never received one.

Cantor said Wednesday that he feels the complaints Kolchinsky raised with Moody's and most recently with the oversight committee are "of longstanding and healthy debate" within Moody's and that the law firm hired to look into them was given "unfettered access" to Moody's records.

"Moody's didn't direct the investigation," he said, adding that the law firm interviewed 22 Moody's employees. "The only person who refused to meet" with the law firm was Kolchinsky, he said.

Moody's didn't respond as directly to the concerns raised Wednesday by another ex-employee, former chief compliance officer Scott McCleskey.

McCleskey's testimony centered around issues he raised to the SEC in March about how Moody's replaced several compliance officers in 2008 with analysts and managers who were previously involved in rating structured-finance and mortgage securities. He said he was "pushed out" by Moody's in September last year after being replaced.

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